Determined to meet the challenge

by Chris Lyddon
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The last few years have seen massive challenges and changes in the grains sector. The International Grains Council (IGC) Conference on June 10 in London, England brought in some of the world’s biggest grain exporters to look at how they are meeting the market’s needs.

Etsuo Kitahara, executive director of the IGC, set the scene for a meeting themed: “Assessing Prospects, Addressing Challenges.”

“Following last year’s droughts in the U.S., parts of Europe and Australia, and the impact this has had on exportable availabilities of wheat, maize and soybeans in 2012-13, the attention of markets has been focused on the export potential of the major suppliers in South America and new crop prospects in the Northern Hemisphere for 2013-14,” he said. “From the viewpoint of trade, major challenges obviously include the vagaries of the weather first and foremost, which largely define the size of crops and export availabilities in major suppliers.”

Thomas Sleight, president and CEO of the U.S. Grains Council, looked at a year in which farmers performed well in highly adverse conditions.

“Last year was a very tough year, a generational drought for the U.S. corn belt,” he said. “U.S. producers produced the eighth largest crop in history. Farmers have continuously improved their management approach.”

New techniques like conservation tillage, mapping technology, hybrids and biotechnology have all contributed to making the industry more capable of dealing with problems. This year has seen its own challenges. There were storms at planting and then excessive rain. Again, farmers rose to the challenge.

“In one week alone, U.S. farmers planted an area equivalent to the size of Ireland,” he said.

The world faces a very big challenge in the agricultural sector, Sleight said.

“World population will be going to 9 billion. World population is majority urban for the first time. China will have more middle-class consumers than the population of the United States. The world must double production by 2050,” he said. “We must move food from areas of surplus to areas of need.”

Trade is the solution

“We’re in this together,” Sleight said. “The U.S. cannot feed the world alone, nor can anyone else.

There is no global food shortage. Trade is the solution. Lack of trust and transparency and reliability of markets is the greatest barrier to trade. Building systems of trust and transparency is essential.”

The U.S. in recent years has been losing market share in grains, he said.

“Steps and resiliency of markets benefits us all. The U.S. lost market share last year. We’re working very hard to win it back this year.”

In the long term, others will need to step up. “We will have a smaller share of a bigger pie,” he said.

“It is a critically important time to get the architecture of trade right,” he said.

He noted that there are already 297 Free Trade Areas in force with more planned.

Maize growers around the world are combining in an international alliance called Maizall.

“These are producers talking together with their customers around the world,” he said. “Meeting the world’s food security needs will not be easy. You and I live in a world where for the first time poverty will not be the norm. When trade works, the world wins.”

Thomé Guth, director, commodity analysis for Oilseeds, Corn and Meat Products, National Company of Food Supply (Conab), Brazil, looked at the situation with maize and soybeans in Brazil. The size of the country gives it one major concern. “We have some problems with logistics,” he said.

In maize, there is potential to produce more.

“We don’t increase a lot of area, but production could increase because of increasing yields. The first crop is stable,” he said. “It concerns livestock producers because they need first crop corn. People like to export the second crop.”

He explained that the harvest, from January to July and August, is at “exactly the time we can export with no competition.”

However, he also explained that the states where the crops are produced are a long way from the exports. The main importer of Brazilian corn is Japan, with Iran coming in second.

“We have a problem this year if the U.S. can produce corn and if Brazil can compete with the U.S. for the Japanese market because the cost of transport from Brazil is worse than the U.S.,” he said. “Our farmers have lost a lot of money because of the transport system.”

Out of a soybean crop of around 81 million tonnes, he put exports at around 38 million tonnes. He said China is the biggest importer of Brazilian soybeans.

He said Brazil is hampered by high production costs. Factors contributing to that include the cost of tax, the cost of fertilizer, the cost of paying skilled workers, the cost of fuel, the cost of seed, and the cost of pesticide.

“When the fertilizers arrive in our ports and go inside Brazil, we have high transport costs and the companies put that cost on to the price of fertilizer. Workers are becoming more specialized, particularly because they had to use big machinery. Payments to farm workers increase a lot. We have high taxes. We’re trying to address this with our congressmen.”

Brazil’s ports are extremely congested, which means problems loading for export.

“One solution is that we have to build more roads and transport by rail,” he said. “We also have to improve our system of storage.”

Dramatic change in Canada

Ian White, president and CEO, Canadian Wheat Board (CWB), looked at the Canadian situation following wheat deregulation. “For us in Canada, the change has been quite dramatic,” he said.

For 75 years, wheat had to go through a regulated single desk system until deregulation occurred in August 2012.

“The views of the industry, from farmers to companies, was particularly polarizing,” he said. “There were those in the farming community who were particularly pleased to continue to sell cooperatively. There were farmers and others in the industry who wanted change.

“We have seen the expansion with the deregulation of the Australian wheat board. We are now in that process. We have had 10 months of that new environment. It has been a very competitive environment. You’re always going to have some sorting out issues. High grain prices throughout this year have made the process easier. Farmers in Canada have a significant amount of on-farm storage. Farmers were able to hold this grain and look at how they would market their crop.”

If you own country assets, its easy to procure from farmers, he said, noting that the CWB didn’t have any. “We set about negotiating handling and port facilities with the grain companies,” he said. “Product delivery patterns have been observed to be very similar to the past,” he said.

He had praise for Canada’s two rail networks. “They responded very well,” he said. “We did see in Vancouver some level of congestion. There were visibly a lot of vessels in Vancouver waiting to be loaded.”

The CWB had to change. “We set about a major transformation from a single seller to a grain company,” he said. “We knew we had excellent relationships with farmers. We knew we had excellent relationships with a huge range of customers. We rebranded the organization. We tried to look and feel different.”

The CWB is now developing plans to open its business further and privatize before 2017.

“We have scaled our business down,” he said. “We have survived quite well in the first year. We have maintained a good position for Canada with this deregulation. Our farmers have adapted quickly to it. The CWB has transformed its business and is now a competitive force in the Canadian landscape. We are all looking forward to the next season.”

Australia has had much longer experience in deregulation. Geoff Honey, CEO of Grain Trade Australia, took a look at how quality can be maintained in a deregulated market.

“In the last four or five years since deregulation, we have had record production, a record shipping growth and a swing into new markets,” he said. “The Australian wheat producer needs to produce wheat to suit the needs of the consumer, cognizant of environmental constraints.”

The consumer’s perception of quality depends on who that consumer is. “For the Australian wheat producer, quality may be a protein percentage,” he said. “For the official, it might be zero tolerance for insects or MRLs. To a Korean baker, quality may mean something quite different. It depends on his products. Did they perform as expected?”

In general terms, higher protein wheat is grown in the northern and dry areas, he said. The eastern states have a very strong domestic market.

“Western Australia is a big producer that is a small domestic market,” he said. “In 2011-12, harvest was a record. In 2012 it was just over 22 million tonnes,” he said.

Honey noted that plantings are up this year. “It looks like we are going to be over 25 million tonnes,” he said. “That is on a pretty tenuous moisture profile.”

Wheat exports in containers are absolutely booming, he said.

“Historically, the Middle East was very much a destination for Australian wheat,” he said. “That has changed significantly since deregulation.”

Exports to Asia went up from 30% to 70% of the total held by Australia’s freight advantage in shipping to that region.